Pound Falls to 13-Month Low Versus Euro as U.K. Economy Shrinks

By Neal Armstrong -
Jan 26, 2013

The pound fell for a third week
against the euro, dropping to the least in more than a year, as
data showed the U.K. economy shrank more than analysts forecast
in the fourth quarter, tipping it back toward recession.

Sterling slid for a second week versus the dollar as Bank
of England policy makers said the currency’s level may prove an
obstacle to rebalancing the economy, which is on the brink of an
unprecedented triple-dip recession. The euro strengthened after
the European Central Bank said 137.2 billion euros of three-year
loans granted to banks under the Longer-Term Refinancing
Operations to avert the sovereign-debt crisis would be repaid
early. Ten-year gilts fell, snapping a two-week advance.

“Things in the U.K. are deteriorating as shown by the
downside surprise with the gross domestic product data this
week,” said Gavin Friend, a foreign-exchange strategist at
National Australia Bank in London. “A reasonable outcome from
the LTRO repayment in the euro area and the weak numbers in the
U.K. suggest the pound can fall further versus the euro.”

The pound fell 1.5 percent in the week to 85.17 pence per
euro, at 5 p.m. London time yesterday, after sliding to 85.37
pence, the lowest level since Dec. 12, 2011. The U.K. currency
lost 0.5 percent to $1.5799 after dropping to $1.5746 yesterday,
the weakest since Aug. 21.

The 10-year gilt yield rose five basis points, or 0.05
percentage point, in the week to 2.06 percent. The price of the
1.75 percent bond maturing in September 2022 fell 0.39, or 3.90
pounds per 1,000-pound face amount, to 97.34.

MPC Vote

The Monetary Policy Committee voted 8-1 to keep their bond-
purchase plan unchanged at 375 billion pounds, according to
minutes of the Jan. 10 decision published in London on Jan. 23.
Members diverged on the risks to the economy, with some saying
there was scope for wages to pick up while others noted that the
economy could grow faster without generating inflation. Bank of
England Governor Mervyn King said on Jan. 22 the central bank is
ready to provide more stimulus if needed.

A survey next week will show a gauge of U.K. manufacturing
growth slowed this month to 51.0 from 51.4 in December,
according to the median forecast of economists in a Bloomberg
News survey.